The Indian law-making and revision procedures are rather complicated, which to a great extent impedes the issuance of policies concerning the rational use of foreign investment. India continues to apply policies that stringently restrict foreign investment in politically sensitive sectors. Foreign investors have not been granted national treatment identical to that enjoyed by local enterprises in many sectors.

4.1 Restrictions on investment sectors

4.1.1 Public utility sector

Foreign investment is restricted in social or public utility production sectors including rail transportation and atomic energy. For instance, Foreign Investment Promotion Board (FIPB) approval is required for all activities other than private sector oil-refining. The government of India also provides that all foreign exploration companies are only allowed to sell petroleum and natural gas found in India within the territory of India from August 4, 2005.

4.1.2 Textile sector

Despite the fact that foreign investment absorbed by India's textile sector is far from meeting the development goal of the textile industry set by the Indian government, the Indian Ministry of Textiles turns to the U.S., Japan and Turkey for foreign investment and does not welcome investment from China, citing the reason that China is the largest rival of India in this sector and that investment from China would greatly influence its decisions concerning the textile industry. Such a position taken by the government of India constitutes discrimination against textile investors of China.

4.2 Restrictions in Foreign Exchange Management

In the foreign exchange management regulations of India, there are the following two special restrictions against several specified countries including China.

(1) Article 4, Foreign Exchange Management (Establishment in India of branch or office or other place of business) Regulations, 2000

This article stipulates that citizens of China must obtain prior permit from the Reserve Bank of India (RBI) to establish any branch, liaison office, project office or any other place of business.

The Reserve Bank of India (RBI) revised the above- mentioned regulation in July and October of 2003. The revised regulation is slightly more liberal, stipulating that Chinese citizens do not need prior permit from the Reserve Bank of India (RBI) to establish manufacturing enterprises or service enterprises in Special Economic Zones in India, but the project fund must be remitted from abroad and the foreign project offices must submit detailed project report to the local regional office of the RBI. Investment in Special Economic Zones must be in one of the sectors in which 100 percent foreign investment are allowed.

(2) Article 7, Foreign Management (Obtainment and Transfer of Real Estate in India) Rules, 2000

Article 7 stipulates that citizens of 8 countries including China are not allowed to obtain or transfer real estate or rent the real estate for over 5 years without the prior permit issued by RBI.

In practice, RBI usually transfers the application documents from citizens of the aforesaid countries to the Ministry of Home Affairs (MHA) responsible for safety issues. Only with the unanimous approval of both the RBI and MHA can the applicants be granted prior permit.